Pakistan Raises Rate for First Time Since 2010 After IMF Loan

By Faseeh Mangi and Khurrum Anis -
Sep 13, 2013

Pakistan increased its benchmark
interest rate for the first time in almost three years, shifting
course after the International Monetary Fund approved a loan
last week to help stabilize the nation’s struggling economy.

The discount rate was increased to 9.5 percent from 9
percent, a seven-year low, State Bank of Pakistan Governor
Yaseen Anwar said at a news conference in Karachi yesterday.
Five of 20 analysts predicted the decision in a Bloomberg News
survey. The rest saw no change.

The IMF called for a tighter monetary policy to contain
inflation and rebuild reserves in approving a $6.6 billion loan
to help the South Asian nation avoid a balance-of-payments
crisis. Prime Minister Nawaz Sharif’s four-month-old government
is also struggling to end a Taliban insurgency and ease power
shortages that have slowed growth in the $231 billion economy.

“Inflation has shot up,” Tariq Hussain Khan, research
head at Pearl Securities Ltd., said before the decision. “You
have to act fast on inflation if you want to achieve the fiscal
deficit target.”

Pakistan’s central bank had reduced the policy rate by 500
basis points since last raising it in November 2010, including a
half-percentage-point cut three months ago. Consumer prices rose
8.55 percent in August from a year earlier, which was fastest
pace in 11 months while staying below last year’s average of
9.73 percent, according to data compiled by Bloomberg.

Private Credit

“This accommodative policy did not bear fruit in terms of
private sector stimulus,” the IMF said in a statement Sept. 12,
referring to rate cuts in the last fiscal year. “Private credit
shrank in real terms.”

The IMF approved a three-year loan program that that seeks
to slow inflation to as low as 6 percent and narrow the fiscal
deficit to 3.5 percent of gross domestic product in the year
ending June 2016, down from an estimated 8 percent in the fiscal
year that ended June 30. An earlier $11.3 billion IMF loan
expired in September 2011 after Pakistan failed to implement
conditions attached to it.

The central bank will avoid focusing on inflation until
2014 to ease fiscal constraints as the government shores up its
finances, according to an Aug. 19 note to the IMF posted on the
finance ministry’s website. Sharif is aiming for 4.4 percent
growth in the fiscal year that began July 1.

Foreign reserves fell by more than half to $4.8 billion in
September from a year earlier, enough to cover about 1.5 months
of imports, central bank data shows. Moody’s Investors Service
said on Sept. 9 that the IMF’s assistance may boost foreign
reserves to $7.3 billion through the 2014 fiscal year.

The Pakistani rupee has fallen more than 7 percent against
the dollar this year and reached a record low on Sept. 2,
compared with a 14 percent drop for the Indian rupee, according
to data compiled by Bloomberg. The Karachi Stock Exchange 100
index has climbed about 38 percent in the period, among the
world’s 10 best performers, on strong corporate earnings.